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Set-Up for Final FOMC for 2021

US EURODLR FUTURES
Widely anticipated, markets are looking for the Fed to announce an accelerated asset purchase taper at today's FOMC policy annc, higher Dots (2-3 hikes in 2022) and inflation expectations.
  • If the Fed delivers as expected, traders are looking for a knee-jerk sell-off in short end proportional to the pace of taper and/or higher Dots.
  • Traders suspect hawkishness likely to be softened by Fed chair Powell's presser at 1430ET, with curves likely steepening (debatable). Side note on Eurodollar futures pricing in hikes to 1.75% by late 2024 w/Green Dec'24 inverted vs futures out to Gold Sep'26 -- implying policy error or chance of rate hikes in 2025.
  • What would shock markets would be a dovish announcement from the Fed followed quickly be a lack of credibility after weeks, if not months, of telegraphing the hawkish shift to address the surge in inflation.
  • While option markets have seen a pick-up in upside insurance call buying over the last week or so, traders look to buy more downside, longer expiry puts in accelerated tapering and particularly in the event underlying rallies.
  • Curves continue to flatten, and inflation continues to climb, perhaps giving the Fed an opportunity to "slow walk" rate hikes, one trader posited. "In fact, the only way the government is going to be able to handle its massive debt burden is THROUGH inflation. And, if wages can keep pace with the cost-of-living, then one might say it's a win/win from the gov'ts perspective."
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